Trump just slammed China with tariffs on $50 billion worth of goods in a move that 'could escalate into a global trade war'

March 22, 2018 at 12:19 PM EDT

Getty Images/Pool

President Donald Trump announced tariffs on imports of Chinese goods.
The Chinese government has threatened to retaliate.
The move is the latest is an escalating trade battle between the US and China.

President Donald Trump announced Thursday that the US will soon impose tariffs on billions of dollars of Chinese imports, a move that could eventually trigger a trade war.

The tariffs, which function as a tax on imports, come in response to a Trump administration investigation into the China's theft of US intellectual property, or IP. For instance, the country has forced businesses to move their patents to China or disclose their trade secrets to do business there.

Trump will impose tariffs on imports of more than 100 different Chinese goods and hit industries from biopharmaceutical to robotics to rail equipment. A full list of products will be released in 15 days according to White House officials, which will give businesses time to petition for certain items to be excluded. The statement will also limit certain Chinese investments into the US.

Chinese officials have already signaled they will respond with tariffs of their own.

"China will not sit idly to see its legitimate rights damaged and must take all necessary measures to resolutely defend its legitimate rights," China's Commerce Ministry said in a statement on Thursday.

Reports suggest China will impose their own tariffs on US exports of three major agricultural products: sorghum, soy beans, and hogs. For soybeans and sorghum, exports to China make up more than 50% of each product's total US exports.

A formal statement from Trump on the tariffs is set to come later Thursday. As part of the announcement, Trump will also declare that the US will file a complaint against China with the World Trade Organization.

Trade war fears plunge stocks

The new tariffs are just the latest in a growing trade spat between the US and China.

Trump imposed tariffs on all imports of solar panels and washing machines in January and then followed up with tariffs on steel and aluminum on March 1, both of these moves drew sharp criticism from China.

While the moves are limited in their scope for now, economists and investors are already worried about the implications.

On an aggregate scale, most economists believe that Thursday's tariffs will have a limited effect. But the move could signal trouble down the road, said Ebrahim Rahbari, director of global economics research at Citi.

"For now, our base case is for moderate increases in global protectionism and for these to mostly remain targeted at specific sectors," Rahbari said in a note to clients. "However, a global trade war, with major adverse impact on global activity, is a material risk."

He added: "Should these penalties be very large, there is a material risk of Chinese retaliation, which could escalate into a global trade war."

The restrictions on trade will likely push up prices on imports of Chinese goods. For businesses that use the imports in their end products, the tariffs will likely drive up costs and lead to increased prices or cuts in other areas of business.

In the event of a trade war, the economic consequence would be much more severe and could even drive the US into a recession. If the fight is even limited to just China, there could still be serious consequences for growth according to Shawn Golhar, head of public policy research at Barclays.

"In terms of China, the US trade deficit is $375.2 billion, so double-digit, broad-based tariffs could have a
deleterious effect on economic growth," Golhar said in a note to clients. "Shortly after the 2016 election, our economists estimated that a 15% tariff on Chinese imports would trim growth 0.3-0.5 percentage points over a four-quarter horizon, assuming China imposes similar tariffs on US exports."

Given the possibility of a sustained trade fight, investors were jittery on Thursday. The Dow Jones industrial average sank more than 400 points leading up to Trump's announcement.

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